What's going on with strata management fees ???

I've been watching the strata management space with particular interest over the last 24 months and noticed some interesting trends.  


Although, I will post more about them next year, for now let's look at strata management charges under contracts and what, I think, it means for stakeholders and the strata sector.

Trend 1 - A shift to user pays

The make up of charges is changing.

Some charges for strata schemes are increasing as strata managers do the following things -

• charge hourly rates (ranging from $75 to $200 per hour) for extras that are outside normal management services 
• charge more for internal administrative resources like printing, email, record storage, etc
• charge for pre-legal levy recovery activities like reminder notices, demand letters, briefing collection agents/lawyers, etc (from $25 to $200)

But at the same time base management fees for the 'usual', 'typical' or 'standard' services have hardly changed in 10 years.

So, what impacts does this trend have ?

Firstly, separating management services between fixed and variable charges works best when what is (and is not) included and excluded is clear and well understood. But this is not the case in most strata schemes.

Secondly, 'extra' services usually need authorisation to avoid disputes about the charges but  this does not always occur and is, often, too ad hoc.  So, there will be disputes about the extra charges.

It's easier to charge extra for automated activities or services where volumes tend to rise naturally and they are easy to provide and scale up (like printing and computer based activities).  But the marginal cost of these things should reduce over time (due to technology improvements) and as volumes increase (due to economies of scale). They haven't and there will be pressure to reduce these charges over time.

Thirdly, the ability to charge for pre-legal actions against owners who are overdue with levies does not mean open ended charges are acceptable. Court decisions have already said the recovery expenses must be reasonably incurred and reasonable in amount. But when strata manager charges to send reminders, notices and instruct collection lawyers/agents are $150 or more for a $1500 levy (approximately 10%) the proportionality is all wrong. And, it is likely to be a case of killing the goose that laid the golden egg.

Trend 2 - Price cutting to get (and keep) business

There are a range of downward pressures on strata management charges.


The continued emergence of micro strata management businesses by entrepreneurial staff who branch out from existing strata management companies … and their lower operating costs and their desire to get new business ... means they are offering management services cheaply (or at least cheaper than market rates).

And more recently some medium sized and larger strata managers are discounting ... with offers like 6 or 12 months free management or beating your current management charges by 10% or more.

So, what impacts does this trend have ?

Firstly, it is hard for strata managers to resist the downward price pressure since existing managers will (usually) need to match the lower charges to keep the business and other competing managers will be tempted to match (or beat) the charges.  So, the downward prices pressures are self generating and will cause even more downward pressure on management charges.

Secondly, strata schemes and their executives will be tempted to assess managers purely on price (if only because that becomes a predominant comparison factor in a price competitive environment).  This is as undesirable for strata management as it is for most services.

Thirdly, as managers have to manage for less money they will have to reduce the standard and/or quantity of services.  So, schemes will pay less but also get less service (and usually will not realize that until after some time with the new manager).  This will lead to either -

• increasing charges for 'extras' to get the same level of service, and/or 
• the temptation to change managers as service dissatisfaction occurs (and possibly find a even cheaper strata management proposal).

Fourthly, as strata schemes and managers focus on charges rather than value when pitching for business and choosing strata managers the overall standard of strata scheme management will fall … with consequent increases in scheme problems, operating costs, owner dissatisfaction, etc. etc, etc.  The proverbial downward spiral.

Trend 3 - Shortening management contract terms

Strata manager tenure is reducing - coming down to 12 months or less in many cases.

There has been a tradition of 12 month strata management contracts with monthly rollover even though the strata scheme is going to be there for a long time and the longevity and consistency of management is a key factor in building outcomes.  This is despite the possibility of having longer fixed terms and the ability of managers and schemes to renew agreements annually at strata scheme AGMs.

But more recently, aside from managers not proposing longer (2 or 3 year) terms and schemes refusing to sign longer agreements, both strata managers and strata schemes are allowing management contracts to stay in rollover mode (operating only from month to month) and thereby further reducing the tenure of strata managers.

As a result, the average tenure of strata manager is coming down to 12 months or less. 

So, what impacts does this trend have ?

Firstly, it destabilises strata scheme operations and manager business stability because neither know who will be managing the strata scheme in 6, 12 or 18 months time.  This is bad for strata schemes and undesirable for strata management businesses.

Secondly, when strata management businesses cannot be sure that they will manage schemes for more than 12 months plus the notice period they must reduce the amount of time (and money) they invest to become familiar with the building and its operational issues.  These are sunk costs that only reap rewards in easier and smoother management down the track.  So strata managers know less about the buildings than they could (and should).

Thirdly, there is an irrational avoidance of discussing and considering strata scheme management issues and solutions as managers try to keep their appointment (and possible removal) off the strata scheme’s agenda.  So, strata schemes cannot easily discuss performance issues without that inevitably leading to considering changing strata managers. It would be better to get the existing manager to change and/or improve performance to better satisfy the strata scheme's needs. 

Fourthly, in the worst cases, strata schemes struggling to change strata managers (having trouble getting meetings convened, obtain proposals from other strata managers and/or having their records transferred) and managers stonewalling (or worse) to stay appointed (and paid) for longer.  This is exactly the opposite situation  from what should occur when the relationship between strata scheme and strata manager breaks down.

All of these things are unintended and (probably) unexpected consequences of these apparently normal trends in strata management.  


So, instead of managers and strata schemes actually discussing what is needed, improving services, paying for quality, getting fair value and creating medium and long term relationships that benefit everyone in (and outside) the strata scheme ... we're getting cheaper service offerings, by more small managers, who change more often and are being assessed on price (before outcomes).

That’s a shame for everyone.

I wonder what will happen with strata management charges (and services) next?

Francesco …